"Your DCF says the company is worth $850m, comps say $780m, and precedent transactions say $950m — which one do you use?" It's one of the most common follow-up questions in valuation and M&A interviews, and it's designed to catch candidates who can calculate each method but haven't thought about how to reconcile them. Here's a structured way to answer it.
Step 1: Name What Each Method Is Actually Measuring
Before reconciling the numbers, show the interviewer you understand why they differ in the first place. DCF is control-neutral and forward-looking; trading comps reflect passive, minority-stake market pricing; precedent transactions embed a control premium plus deal-specific competitive tension. Stating this up front signals you're not just going to average the three numbers and move on.
Step 2: Quantify the Spread
Calculate the percentage spread between the highest and lowest implied values: (Highest − Lowest) / Lowest. A spread under 10% is normal noise; a spread over 20% is worth flagging explicitly and explaining — it usually means the assumptions driving one method (most often the DCF's WACC or terminal growth rate) deserve a second look before you present anything to a client.
Step 3: Weight, Don't Just Average
The strongest answers explain that you'd assign weights to each method based on the deal context, not split the difference evenly. A full-control acquisition should lean more heavily on precedent transactions and DCF; a minority investment should lean more heavily on trading comps, since minority investors don't receive control rights or synergy capture. Walk through a simple weighted-average calculation to show you can execute the idea, not just describe it.
Step 4: Present a Range, Not a Single Number
Close your answer by noting that the output of this process is typically a range — visualized as a football field chart — anchored around your weighted value, not a single precise figure. This is what experienced bankers actually do, and saying it explicitly shows you understand how the analysis gets used in practice, not just how to compute it.
Practice This Exact Scenario
The case When Valuation Methods Conflict gives you the full numbers to work through this framework end to end: three method outputs, the spread calculation, and a weighted triangulation — plus four follow-up questions interviewers commonly ask afterward, including how the weighting changes for a minority-stake deal.
If you want to go deeper on adjacent topics that come up in the same line of questioning, How PE Thinks About Valuation covers how private equity buyers work backward from a target IRR instead of forward from a standalone valuation, and Synergy Valuation breaks down the piece of a precedent-transaction premium that comes specifically from expected synergies.
Common Ways This Answer Goes Wrong
- Picking one method and dismissing the others instead of explaining why all three are informative.
- Averaging the three values with no rationale for the weights used.
- Forgetting to mention the control premium embedded in precedent transactions.
- Presenting a single point estimate instead of a range when the methods meaningfully disagree.